Prof. Hal Hershfield shares some insights on how trade-offs between the present and a future state affect the financial decisions that people make.

i2i has a specific interest in financial decision-making. What are the links between behavioural science and individual behaviour when it comes to the take-up and usage of financial services?

What behavioural science, as well as psychology and marketing, teach us is that, although people may have good intentions and often have their own (and others’) best interests at heart, there is a mismatch between intentions and action. This gap arises because these decisions often involve trade-offs between the present and the future.

We claim we want to smooth consumption or save for the future, but there are many things in the present that demand our attention. We battle with temptations and a lack of self-control, which in turn affect our actions. 

In view of our desire to promote financial inclusion in the developing world, which aspects of behavioural science warrant further research/exploration?

Much more needs to be done in better understanding how behavioural interventions can affect the financial decision-making of individuals with low to moderate income. A lot of work has been about pushing people with some disposable income to start saving. It is more difficult to do that with lower-income individuals, as you can only do so much with the little money that you have. This is one of the areas that needs further research. 

If a financial service provider (FSP) wanted to implement some of the learnings from your “future self” research, where do you recommend they start?

Again, there is still a lot of work left to do in this area, as these ideas have primarily been tested in a hypothetical context. It seems like this intervention (showing people an image of their future selves) might be more effective to implement in the case of “single-shot” decisions, rather than in cases where repeated decisions or behaviour patterns are required. You are making something which is not usually salient, salient.  

Although I imagine this would be effective in a case where we want to prompt people to open a savings account, I don’t know whether this could be used effectively in a situation where someone was, for example, using a credit card to spend money they didn’t have. People are likely to become habituated to the intervention and then start ignoring it. In that case [repeated temptation to misuse a credit card], it would be better for the person to develop rules that become habits. 

It does seem though that some behavioural interventions would be relatively easy to implement at a fairly low cost – for example SMS messaging. 

Something like that may seem simple, but there does need to be an appreciation of the nuances, as something that is successful in one context may be unsuccessful in another. Cultural factors could be very significant and could even affect factors like the ideal timing of messaging. What works well in Mexico may not work in Nigeria.

Are there any FSPs (traditional, digital or fintech) that are doing interesting or innovative things using behavioural science?

There are some companies that have started using some of these concepts around future selves. I consult with Prudential, which has incorporated some of this thinking in the messaging they use for advertising purposes. However, they haven’t yet done rigorous control trials. In academia, if we don’t test stuff with control groups it wouldn’t get published (because we need to be able to isolate cause and effect). In speaking to businesses and my MBA students, I have tried to emphasise the importance of proper testing. 

Is there a new area of research that you are excited about at the moment?

Yes, together with a UCLA post-doc scholar, Adam Greenberg, and a professor at University of Chicago, Abigail Sussman, we are examining how people think about debt, particularly the different forms of debt, and the relationship to financial wellbeing. This is proving really interesting. Often people don’t see that some forms of debt can be helpful. 

Psychologist Hal Hershfield is an associate professor of marketing at UCLA Anderson School of Management. Much of his research focuses on ways to help people make more future-oriented decisions (such as save for retirement). Hal was voted one of Poets&Quants 2017’s Best 40 under-40 Professors.

Refer to our database of select research studies, which highlight behavioural interventions that have been shown to affect financial decision-making, for more details on Hal’s research paper: Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self.